Frequently Asked Questions
Customer education is one of our primary goals. Providing you with access to frequently asked questions is only one small part of our commitment to provide you with the knowledge you need to make the right insurance decisions for your business.
A: The word “audit” is an intimidating term that elicits visions of the IRS knocking on your door. Insurance audits are nothing of the sort- although they can be done in person on occasion. When you buy an insurance policy, the premium is usually an estimate only. That means that the rates are set based on what you tell the agent, but are subject to change based on the actual exposure you have during the policy term. For example, if you receive a quote based on $1k in annual payroll, and you actually have $100k in actual payroll, you can expect to receive a bill due retroactively for 100x your original estimated premium. This is ALWAYS true for Workers Compensation and often true for General Liability policies- although General Liability policies are not audited with the same frequency as Work Comp. The audit simply looks at your accounting records (QuickBooks, tax documents, hieroglyphics on a stone tablet, or whatever you happen to use) to determine what your revenues and labor expenses were relative to what you estimated them to be, and the premium is adjusted accordingly. If you paid too much, it can work in your favor as well.
A: It is only required if you need to keep your insurance policy and/or you want to avoid paying 3 times the estimated premium. Audits that are returned non-compliant can be increased by 200% and if your policy is still in force, it won’t be for long. Rates are determined based on what you tell the insurance company. If they can’t confirm that information through the audit process, they will send you a bill for the maximum allowed by law and promptly send a notice of cancellation. Even if you don’t need or want the policy anymore, that bill will be turned over to a collections agency and will not go away. Suffice it to say that ignoring an audit request is never going to be the path of least resistance for your wallet.
A: If you’re lucky, you’ll get a form to fill out or some sort of “self-reporting” audit. As long as you don’t contradict yourself or give any information that appears to be erroneous, you can answer the questions on the form and that will be the end of it. It’s ok to put $0 if you really have $0. If you have no employees and no payroll and no subs, than put $0 in all the relevant boxes, sign it and return it. Just be prepared to provide tax documents and/or bank account and/or other accounting records that can substantiate that information if it is requested. If you have a phone audit or an audit in person, the auditor will ask for all of the items I just mentioned and they will compile everything in an effort to determine 3 primary items: 1) How much did you pay to whom to do what jobs? 2) How much of that went to employees or individuals without insurance? 3) How much was paid to subcontractors with their own insurance AT THE TIME THE WORK WAS PERFORMED AND PAID FOR? Each dollar figure for each different kind of job carries a predetermined corresponding premium. The result of every audit is simple math to compare what was estimated with what actually occurred in terms of your business operations.
A: A ghost policy looks like and is just like any other Workers Compensation policy. It is an unofficial term used to describe a Workers Compensation policy where the owner is excluded and there is no payroll estimated for the policy term. If you buy a “ghost policy” and then you hire someone (or use an uninsured sub) at any point during the policy term, they are still covered by your insurance policy. It is NOT possible, in any state, to buy a Workers Compensation policy that can be prevented from covering anyone you hire- UNLESS they have their own policy.
A: This question would be answered a little differently by the labor department in each state, but for insurance purposes, the best rule of thumb when it comes audit time or claim time is that there are only 2 classes of labor cost: 1) Laborers (subs, contractors, etc.) with insurance; and, 2) laborers without insurance. If the subs do not have their own coverage, then they are treated the same as employees and it is assumed that you will be liable for them as if they were employees- regardless of whether they receive a 1099, W2, or cash with no accounting records at all. From a General Liability standpoint, if a customer paid you for it, you’re responsible for it. From a Workers Compensation standpoint, if you paid a worker, you’re responsible for the worker. Again, the only exception being if they had their own coverage in place with limits equal to yours.
A: There are a handful of states that have specific exemption allowances for sole proprietors or owners/officers (TN and TX come to mind). However, if your state does not (and most don’t), then there is no legally binding way to prevent your insurance policies from covering the people you hire- even if they don’t want your coverage and you don’t want to give it to them.
Since I have no employees, the law says I don’t have to carry workers compensation, so why is my customer requiring it?
A: There is definitely a distinction between the legal requirement to carry Workers Compensation and the practical reality of not having it. For the reasons explained above, if someone pays you to do work and does not verify that you have Workers Compensation coverage (even if you’re excluded on your own policy), they are legally obligated to pay for injuries you sustain. Even if you don’t have enough employees to trigger a legal requirement, it is a perfectly legitimate request on the part of your customer to protect them from potential liability.